Geopolitical Issues Ahead

9/10/2018

GEOPOLITICAL ISSUES AHEAD:

A Monthly Assessment

Introduction

The shifting pattern of the global economy will continue to define the international system. The dominant perception remains, as some have put it, that the United States is facing its worst financial crisis since 1929. If this is so, the equity markets simply don’t believe it. Standard & Poor’s 500 index is still only about 13 percent below its all-time high. Interest rates remain relatively low, particularly when adjusted for inflation. Therefore, if the markets are leading indicators, as they historically have been, then they are not forecasting a massive crisis. The disjuncture between market performance and the subjective perception of that performance remains remarkably evident, in patterns that normally indicate economic and market bottoms. Our view continues to be that the financial system is coming through the crisis in good shape. There is certainly some stickiness in lending, particularly in those sectors where there is uncertainty as to the value of underlying assets

-- something that affects the entirehousing market, from home sales to mortgage derivatives. This is not a liquidity crisis, but a sectoral uncertainty that appears to be moving to resolution. We are in a slowdown and there may well be a recession, but there is no evidence of a meltdown.

One of the reasons for the stability of the economic system is the fact that high oil prices --and other commodity prices -- have created massive liquidity in the system. The transfer of money from the advanced industrial countries to the oil producers, particularly in the Middle East, has created a massive, dollar-based reserve of free capital looking for a home. This has created a cushion under equity and financial markets that is both stabilizing them and preventing a sell-off. This is not a phenomenon that will end any time soon. So long as commodity prices remain high and generate a level of cash flow that cannot be absorbed in the economies of the Arabian Peninsula, a huge dollar-denominated counterflow of money will continue in the global financial system in general and in American markets in particular.

One of the things cushioning the effect of oil prices in the United States is itsshift from an industrialeconomy to a service economy. The latter simply needs less oil. The off-shoring of industrial production has meant that high energy prices have had a disproportionate effect on new industrial powers, particularly China. We have had persistent reports of gasoline and diesel shortages in industrial areas of China. Given sovereign reserves, there is no financial reason for these shortages. However, the behavior of leading private oil companies in China appears to be diverging from Beijing’s desires. Apart from the snow storms of this winter, and reports of technical problems in some refineries, producers are reluctant to produce in the face of government energy price caps.

The Chinese government has been unable to reduce production growth to sustainable levels. Inflation is substantially higher than official reports. There is fear of unrest if energy prices increase business failures and unemployment. And, of course, there is the Tibet affair, coupled with worries about Muslim terrorists. Add in spot energy shortages and the Chinese government is showing signs of having difficulty controlling the system. We expect the Chinese government in all sectors to move in April to dramatically increase its control of the system. If it succeeds, there will be a period of heavy-handed controls and decreased authority in the regions. If it fails, than the small signs of instability will dramatically increase. The Chinese will have to act to overcome the fuel shortages, and that will mean increased pressure on private Chinese oil companies and the regional party organizations that will control them.

In Russia, higher energy prices continue to fuel government self-confidence. The decision by the Bush administration to demand inclusion of Ukraine and Georgia in NATO, in spite of the idea’s being shut down by France and Germany, is a sign of intensifying tension between the United States and Russia. The Russians are becoming increasingly distrustful of American intentions and will try to work more closely with the Europeans, who are much more afraid of confrontation with Russia than the United States is. The table will tilt against American companies doing business in Russia. Business will still be done, but it will become harder for Americans to compete with Europeans. The Russians hope this situation will resolve itself after George W. Bush leaves office, but the stronger John McCain appears, the more they will assume that thesituation will continue.

We see these major trends continuing in the coming months: The financial crisis is being managed; the Chinese are under increasing pressure as a result of rising commodity prices coupled with problems in their financial system and in peripheral territories like Tibet and Xinjiang;and Russia is continuing to grow in confidence as the United Statescontinuesits effort to contain it. In April, we urge the client to keep a very close eye on China, whereinternal pressures are increasing.

East Asia/Oceania

China

In the coming months, the Chinese government will continue to take pre-emptive measures against threats to the summer Olympic Games, which will be held in August in Beijing. These measures include limiting public protests, censoring media (both foreign and domestic) and tightening Internet controls. Stratfor expects to see seemingly disparate activist campaigns (such as Save Darfur and Save Tibet) to coordinate their anti-Beijing activities in hopes of bringing many different regional and topical issues under one banner.

Beijing will try to undermine such activities and prepare the world for a crackdown by lobbying foreign governments and personalities to not support such groups. Geopolitical lightweights (e.g.,Cambodia and smaller developing countries) and a few geopolitical middleweights (e.g., economically developed but geopolitically less influential countries like Singapore) have already endorsed the Chinese regime’s actions towardTibet. Expect geopolitical heavyweights (e.g.,Australia, the United Kingdom) to lend their support toBeijing over this issue closer to August.

With four months left until the Olympic Games, any and all politically contentious issues will be quashed or shelved until September -- even the issue of China’s new superministries, for which only superficial bureaucratic reshufflings and office-space openings will occur until after the games.Nor will any significant policies (beyond the most mundane administrative changes) be made or discussed, including anything related to the proposed new Energy Law. The new energy bureau recently created as a substitute for the originally proposed ministry of energy will be kept under the tight control of the National Development and Reform Commission, the top state economic planning agency.

Also in the coming months, activist groups will attempt to sabotage Chinese security arrangements for protecting the Olympic Torch’s global tour. Attempts to disrupt the tour inside China will unlikely succeed. Even if the torch’s journey is not completed, it will not stall Beijing’s determination to host the game as planned. Beijing will also try to keep socially volatile issues like food inflation contained through August and use other issues such as Tibetto fan the patriotic flame and galvanize the population behind a successful summer Olympics.

South Korea
There will be more rhetorical sparring between North and South as newly elected South Korean President LeeMyung-bak seeks to realign Seoul closer to Washington and as Pyongyang tries to create a sense of crisis (e.g., by conducting missile tests) before resuming talks.This is a tactic Pyongyang often uses to set negotiations to its favor.

Thailand
While tensions are still running high, a lack of violence since the December 2007 elections and the return of deposed Thai Prime Minister Thaksin Shinawatra’s to Bangkok signal some sort of compromise between the military and the new government in shaping the country’s future. Under Thaksin’s influence, the government appears to have agreed to allow the military to consolidate recent successes in securing Thailand’s volatile southern region in return for its acceptance of Thaksin back into the political mainstream after almost two years in exile.
In the coming months, we will also see the lifting of more restrictions (especially those imposed over the last year) on foreign investment inside Thailand, primarily via a dilution of the Foreign Business Act. This and other Thaksin-style initiatives (e.g., funneling funds directly to its grassroots support bases) are designed to yield quick and quantifiable results for the incumbent People Power Party at the helm of Thailand’s newcoalition government.

Japan

Political infighting will continue to make governance difficult inJapan as incumbent Prime Minister Yasuo Fukuda watches his public support diminish.A new fiscal year is about to begin inJapan, and a lack of consensus in Parliament over how state funds should be spent could haveeconomic as well as defense ramifications. As Seoul continues to push for greater alignment with Washington, Tokyo may also start leaning closer toBeijing in diplomatic dealings to gently remind Washingtonof Japan's strategic importance as a long-standing ally in the region. Tokyo has no intention of ending its cooperative relationship with the United States, but occasional friction points will continue to emerge (such asParliament's recent failure to approve a budget for U.S. bases in Japan).

Eurasia

Russia

Russiaelected a new president in early March, Dmitri Medvedev, and already Russia’s two largest rival clan[state-owned corporate?]assets -- natural gas giant Gazprom and oil giant Rosneft-- have moved to secure their own people in the other’s company[cross-pollunate?]. On March 13, Yuri Petrov, a Gazprom supporter and Medvedev ally, was nominated to Rosneft’s board. The rivalry between the two firms is one of the major battles between the clans[what clans?], and Petrov’s nomination is part of a personnel shuffle that could either increase tension between the clans and companies or prove to be a brilliant move by Putin to strike a balance and deal between the two clans that could tear Russia apart[the balance could tear Russia apart? this would be a brilliant move by Putin?]. April will see a continuation of the drama, though not much of substance will play out until Medvedev takes office in May.

The NATO summit April 2-4 in Bucharest, Romania, setthe course for relations in the coming months between the West and Russia in everything from diplomacyto energy matters. The summit came off of March developments that had U.S. President George W. Bush announcing his pursuit of NATO expansion not only into Croatia, Macedonia and Albania but also the former Soviet states of Georgia and Ukraine.

The tacticopens up a host of issues. First, Europe disagrees with the United Stateson pursuing NATO membership forGeorgia and Ukraine. Europe knows that if Russia lashes out in revenge, then Europe will be hit hard and not the United States. Another issue is how Russia will respond. Moscow has numerous options, from actively pursuing Ukraine or Georgia’s governmental collapse to shutting off natural gas supplies to Europe. Indeed,Washington’smoves and Moscow’s reactionsmay well look like a new Cold War. In April we will see how far the West is willing to goin using the NATO-membership maneuver and how relations between the West and Russia will look over the next six months.

On March 19, Russia’s Federal Security Bureau raided the Moscow offices of TNK-BP, the BP joint venture in Russia. Gazprom has long had its eye on taking over the joint venture,and the devouring of companies owned by oligarchs and foreigners has been repeated often in the ongoing consolidation of Russia’s energy sector. Raising the stakes on March 20, Russian authorities arrested a BP employee and a man linked to the British Council[what is this?]on charges of industrial espionage. The latter arrests signaled a move beyond mere Russian energy consolidation toward a Cold-War lashing out at London.

April will see not only a continuation of moves against BP, TNK-BP and Great Britain but alsoa hearing in Russian courts on whether to charge BP with tax evasion. The tit-for-tat between Russia and Great Britain will continue in the months to come.

Belarus

Belarus and the United States are locked in a diplomatic row over sanctions and human rights inBelarus. The U.S. Embassy in Minsk has reduced its staffing, and the ambassador to Belarus, Karen Stuart, has left and returned numerous times over the past month. In March, nearly 50 percent of the U.S. Embassy staff has left, leaving only 17 people in Minsk. In turn, the Belarusian Embassy in Washington is planning to reduce its staff in April. The United States and European Union have long imposed sanctions on Belarus over human rights concerns, even banning President Alexander Lukashenko from traveling to their countries.

During the last week in March, Belarusian security forces broke up an opposition rally and jailed dozens of activists, pushing both the United States and European Union to more sanctions. Ambassador Stuart is urging Washington to implement new sanctions on oil products firm Belneftekhim. Sanctions against Belneftkhim were also implemented in 2007, but lifted once Minsk began seeking better ties to the West-- an effort that was short-lived. Belneftekhim's activities account for about a third of Belarus' foreign currency earnings, and sanctions would freeze the accounts of Belneftekhim’s U.S. subsidiaries.

Turkmenistan

Turkmen President Gurbanguly Berdimukhammedov became the first Turkmen leader to attend a NATO summit when he attended the alliance’s upcoming heads-of-state meeting April 2-4 in Bucharest, Romania. The move indicated that Berdimukhammedov is trying to balance his country between the West and Russia while both sides try to pull Turkmenistan off the fence.

Latin America

Argentina
Argentina will continue to suffer power shortages in the coming monthsas it garners a small[smaller?]share of natural gas then[than?]its Brazilian counterparts, althoughBrazil has offered to provide Argentina with electricity during peak demand times. Argentine President Cristina Kirchner’s plan to adjust the country’s time-zone change has had little effect on electrical consumption.

The country’scurrent agricultural unrest, [brought on by ?] is unlikely to be resolved in the short term; the sector can easily paralyze the country’s transit system, halting not just transportation but also the movement of nearly every basic good. The government has issued a plan to appease smaller-scale farmers, but road blocks remain in place. Further government concessions are likely.

Brazil

Brazilhas secured natural gas resources from Bolivia, but the latter’snotorious unreliability means [Brazil’s energy?] situationremains far from certain.[what is the situation, exactly?] State oil firm Petrobras will continue its dominance in the regional energy sector[Brazil has energy problems yet its state-owned oil firm dominates the regional energy sector?]-- more investments, exploration and partnerships are all on the short-term horizon. One of these partnerships could be with Mexico’s state oil firm Petroleos Mexicanos; developments on this front are pending amidst Mexico’s energy reform[as Mexico reforms its energy laws? sector?].Following disappointing increases in crude output in previous months, [Petrobras?] is nearing completion of four new offshore drilling platforms that will increase output in the coming months, though not likely in April.

Bolivia

Although an upcoming referendum on the constitution has been postponed, a lowlands vote for official autonomy is scheduled for May 4. This could cause military action from the highlands, further disrupting supplies[of what? what has been causing the disruption up to now?]. In anticipation of the vote, there will be more disruptive antics from the lowlands in April, ignoring export laws from La Paz.[not clear. who, what, why? please be more specific]Bolivian President Evo Morales has publically expressed support for supplying Brazil with natural gas, [which will likely cause gas shortages for Argentina in April as Bolivia diverts supplies?]. To help control output, Morales has also set an April 30 deadline for nationalizing some key energy companies in the country, including Andina, controlled by Spain's Repsol YPF; Chaco, owned by BP;Transredes, controlled by Ashmore Energy International; and the [?-owned]storage and fuel transport firm CLHB[Clean Harbors?].